US-China trade tensions ratcheted higher last week when President Trump threatened to levy a 10 per cent tariff on an additional $300 billion of Chinese goods by September 1 if trade negotiations don’t move forward sufficiently. China’s response was decisive: the world’s second-largest economy let its currency depreciate to above 7 yuan/dollar, its weakest level in more than a decade and down more than 2 per cent since the end of July. Beijing also announced that it would suspend US agricultural imports. The reaction of financial markets was unanimously and resoundingly negative.
The Dow kicked off trading this morning 500 points lower, while the yield of the benchmark 10-year note sunk to 1.7 per cent. As we write this, the Dow is now down more than 700 points. Trade-sensitive sectors slumped on the news; semiconductors are now off more than 5 per cent. Gold, meanwhile, considered a stable currency alternative, gained nearly 1.5 per cent. Bitcoin surged more than 8 per cent from Friday’s close.
The escalating trade battle with China is taking its toll on US imports, which slipped 2.1 per cent (about $4.3 billion) between January and June 2018. The reduction of imports from China accounted for $5.6 billion, or 130 per cent of the total. The difference suggests that some of our other Asian trading partners are benefitting from the escalating trade dispute. However, while US imports from Japan, Taiwan, Korea and Singapore collectively grew $1.2 billion over the last year, they offset only about 20 per cent of the hole left by China. Investors recognize that a drop in global trade activity hurts the global economy, and that concern is reflected in today’s market action.